If there is one truth when it comes to business ownership, it’s that at some point all businesses will need funding. This need often occurs more than once in the life of companies.
Start-up costs and scaling your business are the most common reasons that companies turn to lenders for business term loans. The process of borrowing money is a simple one, but before you head in to see your lender, there are a few things you need to know.
Business Loan Options
There is a myriad of business loan options available to businesses of all sizes. Let’s take a look at some of the most common you will encounter.
A traditional business term loan dispurses as a lump sum. Attached to this is also the agreement of repayment with a fixed or variable interest rate. Banks typically offer two different types of term loans: intermediate and long term.
With an intermediate-term business loan, businesses can expect to make monthly installment payments. These payments may come with a balloon payment option.
With a long term loan, businesses will generally need some form of collateral. Collateral can be anything from a percentage of the loan to a building. The length of time you will be making payments is dependant on the length of the term. Some terms are as short as 5-10 years while others can last upwards of 20+ years. It’s also common for a lender to require the borrower to limit their future financial risks during this time.
What Do Lenders Look At
The requirements for a business term loan may vary between banks and lenders, but there are a few key features that are relatively common.
Most bankers look at what is commonly known as the five C’s.
- Character
- What sort of experience do you or your business have in managing large scale loans? How long have you been running your business and have you done so successfully?
- Credit
- This phrase is a give-in considering we’re talking about business loans. If you’re a small business, lenders may want to know about your personal credit history as well.
- Collateral
- What are you willing to put down as repayment and how are you going to be paying them back? A well thought out business plan does wonders for this section.
- Capital
- Banks will want to know what you have that can be liquidated if you are unable to meet the terms of your contract.
- Confidence
- Remember when we said to come prepared with a solid business plan? Here is where you will show them exactly you will be making money off of this business loan? What are your projections and realistic expectations for this loan?
What Information to Bring with You
It would be nice if we could walk into a bank, ask for a large business loan with no questions asked. Alas, gone are the days of the handshake deal. Now you must prove your worth, but thankfully we are here to help guide you in finding the right business loan.
Before walking into your appointment, there are a few things you will need.
- A Voided Check From Your Business Account
- You must prove that you have an open business account where they can deposit funds.
- Profit and Loss Statements
- The P&L statement gives the lender a chance to see how you are managing your business and shows them an indication of how you will handle your small business loan.
- Business Plan
- One of the things you want to stress in your business plan is your current financial structure and how you will be using the loan.
- Business Tax Return
- Banks and lenders are using this information to verify your profit and loss statements. They want to see what revenue has been reported. Some may ask for multiple years to see if there are any patterns.
- Personal Tax Return
- If you’re a small business that is new to the industry, lenders will need some security to know you can repay your business loan. They may require a personal tax return to be submitted.
- Credit Score
- Most banks will pull this themselves; but, it never hurts to prepare. Knowing where you stand gives you a better understanding of how they will view your proposal.
- Keep in mind there’s a difference between a business credit score and a personal one.
- Balance Sheet
- This sheet allows lenders to know what the business owns and a listing of its debts.
Creating a Business Plan for a Term Loan
Building a business plan for a term business loan is one-way lenders can determine if you know your market. Have a well thought out strategy for how you are going to use the funds and be clear when conveying that message.
When creating this plan, you need to think of quality and content. Loan underwriters will be looking heavily at the financials, so this is where you want to focus most of your attention. Make sure to include a loan amortization schedule, use of funds table, and cash flow projections.
The whole point of the business plan is to put the lender’s mind at ease. Let them know that you’re low risk and their money is safe and well spent in your hands.
The True Cost of a Business Loan
When taking out a term loan, there will be costs involved. From down payments to interest rates, every business loan has a cost. While the fine print will vary among banks and lenders, there are a few general phrases you need to know.
- Amortization Schedule
- This schedule specifies how much the payments will be and how often.
- Origination Fee
- Much like purchasing a house that requires a down payment some lenders may need you to put a percentage down on your loan.
- Loan Rate
- This term is one that you will want to pay strict attention to as this weighs heavy on your overall repayment. Lower percentage rates are the goal, but there are varying factors that determine what you receive. The main factors include creditworthiness, amount of loan, and business credit score.
Businesses who are seeking a loan and have no credit or very little credit still have options although you may face higher interest rates or more substantial down payments and collateral. It may be a good idea to have a co-signer waiting in the wings.
Some great ways to establish business credit is to open a business bank account, get a business credit card and make sure your company makes its payments on time, if not early. Simple steps such as these will help boost your business credit score.
Term Loans and Taxes
A common question when it comes to receiving a large sum of money into a business account is how will your business loan be taxed. The short answer is in most cases it won’t.
Although it looks like your business has received a massive influx of cash, it’s not qualifiable as revenue since it’s originating from a lender as a business loan it’s viewed differently in the eyes of the IRS.
Depending on your business structure and type of business you may help lessen your tax burden by deducting your interest payments from your tax liability. Before attempting this, double check with your accountant/accounting department. Different loans have different qualifications they may have to meet.
Predatory Lenders
A bank’s main priority is to protect their interest. They’re typically only willing to invest in low-risk high yield ventures which are not always suited to small businesses.
Every business term loan has its own set of risks, but there are other lenders out there that are willing to help with few requirements.
While you are the one who needs the financing keep in mind, you are also shopping for who you want to do business with. You will be in a long term relationship with your lending specialist so having one you can trust is something that one cannot put a price tag on.
Knowing what you are looking for is the best shield from predatory lenders.
There are some key traits to look for when dealing with these kinds of lending practices.
- Hidden Fees
- There is nothing worse than getting hit with hidden fees. Lenders that are not upfront with their costs should be avoided.
- Pushing for you to lie on an application
- This is an obvious one, but if you are ever asked to lie on an application, you should run in the other direction.
- Pushy sales agents
- While you want an agent that is eager to help you out, they should never become overly aggressive in getting you to sign for more than you need. One great idea is to use a term loan financial calculator to calculate how much you can borrow.
The Bottom Line of Business Loans
There are some great business term loans out there that can help your business succeed. At DealStruck we only have three requirements for our business term loans, and our lending specialists are high quality, no pressure agents that are here to help guide your business into the right loan for your needs.
Have questions, give us a call. We would be happy to help.